December 15, 2011

In this market update we explore the various buyer demographics in the marketplace; how they act; what they are looking for; how they consider value and make offers; and how sellers can position their homes to meet this demand.

Buyers in the Marketplace

Local Home Owners:

The number of local homeowners that are able to sell their current homes at a price that will enable them to trade-up or trade-down given the leverage they have amassed on their homes is small. This is almost an absentee buyer group in the current market. However– the ones that have liquidity know what they want (aka: emotion) and will pay up for a home that fits the bill.

Relocating Buyers:

Are a key buyer demographic for current local real estate trends as the number of relocating families are a function of the local economy and job marketâ€”which drive home prices. If this group is missing, then the location has experienced greater price declines. These are the best buyers in todayâ€™s market as they have urgency: their children need decent schools & the bread winner must hit the ground running to assimilate into their new career roles.

Renters turned Buyers:

Generally these folks were priced out during the exuberance at the top of the market and have waited years to buy a home. They drive a very hard bargain; think more like investors than home buyers; and will grind sellers down on price all the way until the home closes. Their biggest mistake is often purchasing the wrong home for the right price. Their primary source of data is lowest comps they can find, and always use distressed sales as comps.

First Time Buyers

There arenâ€™t many first time buyers in the current market. The biggest structural change is over-leverage relative to incomes. A very close second structural change are demographic variationsÂ in the buyer pool: we are in-between home buying generations with GEN â€˜Yâ€™ reaching maturity as home buyers in 5-7 years.Â These buyers usually start in the low end of the market and work their way up over time.

Investors:

Are looking for the best deal they can get: scouting for cash flow or capital appreciation thru additions and/or remodel. There is no emotional pull for these buyers; they often buy with cash using other kinds of leverage, and look for distressed opportunities.

The â€œJob Creatorsâ€ aka â€œThe 1%â€

These buyers typically buy homes at the high end with cash. Even this groupâ€™s buying patterns change with the economy even though their purchasing power is not materially affected– which is why the high end of the market is so slow right now. These folks can afford to pay the prices, but they are value-minded unless the home is a MUST-HAVE addition to the family real estate portfolio in which case they move very fast with conviction.

Market Velocity

The velocity of transactions has slowed in recent years both in term of actual unit sales, but also in terms of how buyers research, visit and negotiate for homes. Home buyers today generally take much more time to look for homes, weight their choices and then pull the trigger. The exception is relocating familiesâ€”they act with conviction and urgency. This group is looking for turn-key homes in decent neighborhoods.

Additionally, demand hits the market in fits and starts. There are long lulls between â€œflurriesâ€ of buying activity. This off-again, on-again nature of demand for homes in Marin County Real Estate occurs in tandem with normal seasonal activityâ€”where more deals are closed during the strong Spring market, and an uptick of sales in the Fall. The â€œoffâ€ patterns seem to generally track downside volatility in stock market indexes; Patterns of buying activity in the last 12 months are not-correlated with stocks nor interest rates.

Buyers wonâ€™t submit offers unless the home is a â€œcompelling Valueâ€– price continues to drive sales. Homes need to be aggressively priced to sell during a â€œflurryâ€ of buying activityâ€”if you arenâ€™t properly priced and you miss a â€œflurryâ€ youâ€™ll have to wait until the next one which, if the past is any indicationâ€”will be several months away; or if the home is over $4m could be many months away.

Home Valuation Trials: Comps & Intrinsic Value

Most realtors advise clients on home valuation information by pulling similar recent market sales (â€˜Compsâ€) and comparing them to the subject property. This source of home valuation data is less and less meaningful as similar â€˜Compsâ€™ have larger and larger spreads. The result of larger spreads in â€˜Compâ€™ sales is greater confusion as realtors become story tellers: they have to explain BOTH the distress in the market as well as the qualitative/quantitative relative differences across â€˜Compâ€™ samples:

At some point almost every home buyer becomes exhausted & thoroughly confused by these layers of explanation and resolves to do their own research. This usually results in an online $/SQFT analysis using AVM data from an online real estate siteÂ like Zillow.

Once a home buyer resolves to do their own research online using free home valuation data every negotiation suffers. The data is intrinsically inaccurate while also being symptomatic of our times– the distress evident in the spread of home sale data is impossible to read in the numbers found online.

The process of valuing homes in relation to other homes that have recently sold creates momentum in whatever direction prices are moving until there is a strong polarizing catalyst.

The comps tell us nothing about a homeâ€™s true worth– only the approximate current market valueâ€”and even that is deceiving in this market. Market values are driven by emotion; intrinsic value is a function of the input materials of the house, the lot & location of the house, local job market & fiscal health of the municipality, and the quality of life evident in the communities.

People want to buy homesâ€”it still IS the American Dream. We have to reprogram the way buyers think about home value. It is irrelevant that the home next door was distressed and sold for a pittance– what matters is the intrinsic value of the house relative to what a buyer can purchase it for today. Homes are trading about 14% under their intrinsic value combined with the effect of the lowest interests rates ever creates the best affordability of the decade.

In Conclusion

As of the preparation of this report on Dec. 1st, 27% of the homes currently on the market in Marin are in contract. This is indicative of a healthy real estate marketâ€”buyers and sellers are agreeing to prices en-mass. Very similar to last year, this late-season flurry of deals occurred closer to Thanksgiving than Halloween.Â The largest difference from last year is the lack of high end deals that statistically â€œsavedâ€Â 2010 from being a poor year- particularly for Tiburon & Belvedere prices which are more affected by a few, missing high-end sales.

The biggest statistical change in 2011: Tiburon & Belvedere are both having tough years with average prices down near 20% from â€˜10. This is the 3rd -20%+ year for Belvedere since 1960 (â€™91, â€˜09, â€™11).

The good news is that San Francisco leads the country in job creation (+15% from trough) so home sales and prices should marginally improve thru SpringÂ 2012 (65% likelihood*). The caveat: if the EU unravels and the financial â€˜contagionâ€™ spreads to the US it will force us back into recession (30% likelihood*).(*Ken Rosen)

Earning Your Business

The purpose of this Southern Marin Real Estate Blog is to offer greater insight into Marin County’sÂ local real estate markets than you can find anywhere else– to help you make better decisions for yourselves and your family. The research found in these pages is our competitive advantage in this market. We have yet to find a rational buyer who doesnâ€™t respond to this data; remember most buyers emotionally want to buy a house– they just donâ€™t understand the value proposition. You deserve a agent to represent you on either side of the transaction that has doneÂ their homework.Â If you are thinking about listing or buying a home all we ask is that you include us in your interviewing process.